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CMA Foundation · Fundamentals of Business Economics and Management · Means of Production

Meera Textiles doubles all its inputs (labour, machines and cotton) and finds that output rises from 1,000 metres to 2,300 metres of cloth. Which of the following describes this situation?

This is increasing returns to scale. When every input is doubled, output more than doubles, rising from 1,000 to 2,300 metres. Returns to scale concern proportionate changes in all inputs together, whereas diminishing marginal returns concern changing only one input.

  1. AIncreasing returns to scaleCorrect
  2. BConstant returns to scale
  3. CDecreasing returns to scale
  4. DDiminishing marginal returns

Explanation

All inputs have doubled, so this is a change of scale. Output has risen by 130%, which is more than double (2,000 would be double). Output rising more than proportionately is increasing returns to scale. Diminishing marginal returns applies when only one input is varied, so it is wrong here.

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